Question

QUESTION 1 40 MARKS

PCA Ltd declared bankruptcy in June 2020 soon after publishing the financial statements for the year ended December 2019. PCA Ltd’s financial information for 2016 through 2018 are presented below.

PCA Ltd's
Income statement for the year ended 31 December
2017		2018
(R' Millions)		(R' Millions)
Revenue	1 950		2 114
Cost of sales	-1 413		-1 413
Gross profit	537		701
Operating expenses	-452		-471
Operating profit	85		230
Interest Expense	-63		-81
Profit before tax	22		149
Income tax	-8		-51
Net profit	14		98

PCA
Balance Sheet as at 31 December
2016		2017		2018
Assets
Current assets
Cash and cash equivalent	12		10		82
Accounts receivable	297		199		315
Inventories	431		472		735
Prepaid expense and other	45		27		66
Total current assets	785		708		1 198
Non-current assets
PPE	130		224		326
Other assets	736		851		1 239
Total non-current assets	866		1 075		1 565
Total assets	1 651		1 783		2 763
Liabilities and Equity
Liabilities
Current liabilities
Overdraft	21		30		145
Accounts Payables	289		504		600
Accrued liabilities	122		128		111
Taxes payable		17		24
Total current liabilities	432		679		880
Non-current liabilities
Loans	354		412		1 188

Other long term liabilities	14	12	29
Total non-current liabilities	368	424	1 217
Total Liabilities	800	1 103	2 097
Equity
Share capital	750	578	563
Redeemable preferable shares	101	102	103
Total equity	851	680	666
Total liabilities & Equity	1 651	1 783	2 763

REQUIRED (a)	Discuss whether information in the above financial statements provides any warnings about the company’s eventual demise. Your answer should be based on an analysis of PCA’s 2017 - 2018 activity, solvency, liquidity and profitability ratios.		Marks
24
(b)	Briefly describe any anomalies or peculiarities in PCA’s ratios or financial data		10
(c)	Breakdown PCA’s ROE for 2017 - 2018 and comment in light of the current situation faced by this company.		6
TOTAL		40

Answer 1